Will the S.E.C. Kill Crowdfunding?

Crowdfunding has the potential to provide new funding options for small businesses and stimulate job growth, and yet the S.E.C. has stalled on crowdfunding Rulings.

Other countries are off and running with equity crowdfunding, such as the United Kingdom, Australia, Sweden, Norway and Finland. Why is the U.S. still stuck in first gear and lagging behind the pack? Aren't we innovators and leaders in entrepreneurship?

What’s going on with the S.E.C. crowdfunding Rulings, as spelled out in the JOBS Act? Why are they stalled? Will the S.E.C. abort crowdfunding before it gets a fighting chance?

The report’s recommendations for economic growth through entrepreneurship highlighted crowdfunding, and many participants at the live address called for the S.E.C. to stop delays and issue crowdfunding Rulings.

To understand what’s next for crowdfunding and a possible timeline for the forthcoming Rulings, it's important to have a bit of context and background on what's gone on at the S.E.C. to date.

Politics at the S.E.C.

Crowdfunding legislation passed Congress almost a year ago in March, 2012. As the Wall Street Journal reported, S.E.C. Chairwoman Mary Schapiro delayed the Rulings on crowdfunding because of her personal concerns about her legacy.

When Schapiro left office on December 31, 2012, Elisse B. Walter, an existing commissioner at the S.E.C., took the position of interim chair.

Initially, it seemed Walter might continue as chair for her remaining year-long term and issue the crowdfunding Rulings, since she has been at the Commission during this legislative and ruling period. Insiders speculated that she would pick up the Rulings quickly after taking office and see them through.

However, the game changed when the Obama Administration nominated a new S.E.C. chairwoman, Mary Jo White. The passing of a few months with Walter as interim chair with no action, and then the introduction of a new chair, who has yet to be officially confirmed, has added to the delays.

There are additional criticisms of the S.E.C., such as the so-called revolving door. Former key players at the agency have been accused of angling for lucrative private-sector jobs and allowing their personal ambitions to color their regulatory work, in effect: being soft on crime in order to land a new gig.

No one is accusing Schapiro of courting future employers, but by allowing personal concerns to delay rulings, it’s clear the chair of the S.E.C. has significant power to choose priorities for the Commission, and to impact how those priorities are carried out.

This begs the question: How will the new nominee for S.E.C. chair, Mary Jo White, proceed on the crowdfunding Rulings?

Who is Mary Jo White and is she pro-crowdfunding?

Mary Jo White is known as one of the toughest, most effective litigators and prosecutors in the country – as President Obama said

WASHINGTON, DC - JANUARY 24: Former U.S. Attorney for the Southern District of New York Mary Jo White (C) speaks as U.S. President Barack Obama (R) and Director of the United States Consumer Financial Protection Bureau Richard Cordray look on during a personnel announcement at the State Dining Room of the White House January 24, 2013 in Washington, DC. President Obama nominated Mary Jo White to become the new chairman of Securities and Exchange Commission. (Image credit: Getty Images via @daylife)

during the announcement of her nomination, “You don’t mess with Mary Jo.”

Take a brief tour through her resume, and you can imagine her playing the role of both villain and hero in episodes of Suits or Law & Order, depending on which part of her career you’re considering. In real life, as the hard-nosed U.S. District Attorney, she put away bad guys like mobster John Gotti. And on the other side, as a high-powered defense attorney, she’s defended executives at Bank of America and Morgan Stanley (dun, dun, dun).

Google her name and you’ll see a debate swirling about whether or not her nomination is an example of “regulatory capture.” As a recent Rolling Stone article inquired: Is the fox really the right nominee to guard the henhouse?

Her supporters cite her single-minded pursuit of justice, and insist that she’s above corruption. Her detractors worry that she’s in bed with the very industries she would be enforcing.

I reached out to a few leaders in the crowdfunding movement and asked them for opinions about Mary Jo White’s nomination, and how her leadership might affect both the timing of the Rulings, and the Rulings themselves.

Understandably, crowdfunding experts can’t predict White’s exact position on crowdfunding yet, but across the board they cited her solid reputation and her ability to get things done.

Karen Kerrigan, President and CEO of Small Business & Entrepreneurship Council noted White’s reputation for “high ethics,” and said the only assumption we can really make is that if fraud is committed or S.E.C. laws are broken, “Mary Jo's S.E.C. will come after you.”

According to Candice Klein, CEO and Founder of SoMo Lend, White “weeded out significant fraud in her tenure practicing law,” and Klein believes the crowdfunding rules drafted by the S.E.C. staff are “likely very much in line with (White’s) track record.”

Douglas S. Ellenoff, Securities Attorney at Ellenoff, Grossman & Schole, has a similarly optimistic outlook. He notes that White is an “exceptionally skilled and accomplished prosecutor,” and went on to say that he trusts and hopes White “will make (crowdfunding) one of her priorities.”

It seems there’s clearly hope for crowdfunding under White’s leadership, but what about the timing of Rulings?

Timing on Crowdfunding Rulings

Among myself and other crowdfunding insiders, there’s basic consensus regarding the timing on Rulings for Title II (General Solicitation to Accredited Investors), and Title III (true public “crowdfunding”) of the JOBS Act.

An aggressive prediction is early April, according to Karen Kerrigan. Her target date is based on the one-year anniversary of the signing of the JOBS Act, and her deep long-time ties as a D.C. fixture. She believes it would be an “embarrassment” if Rulings aren’t issued by April 5, 2013.

Doug Ellenoff “hopes and trusts” that we’ll see Rulings on Title II before the end of March, 2013, and Title III sometime in the fourth quarter.

As an outlier to industry consensus, Candace Klein believes that Title II will lag behind Title III Rulings. Klein explained the lag, saying, “The general solicitation issue (in Title II) is a heated topic among the S.E.C. commissioners, and I believe there is more unanimous support for crowdfunding (in Title III) at this time.”

To summarize, the most optimistic predictions for timing of Rulings is end of March or early April 2013. The most conservative estimates for the Rulings are fall of 2013 or sometime in the fourth quarter.

The Future of Crowdfund Investing

Clearly, the delays in S.E.C. Rulings have been troubling. The good news is that there is a whole host of top leadership in both public and private offices keeping pressure on the S.E.C. to put aside politics and personal concerns, and issue these Rulings as soon as possible.

That includes groups like CFIRA & CfPA, Steve Case of Revolution, the Case Foundation and Startup America Partnership, the Kauffman Foundation, and many more.

There is reason to believe that Mary Jo White, nominee for S.E.C. chair, “gets it.” Key players are hoping she understands the main issue, which Ellenoff summarized this way: “Facilitating capital formation for entrepreneurs and creating jobs must be equally important to enforcement actions against those that violate the Federal securities laws.”

Here’s How You Can Help

It’s important to understand the political roadblocks to crowdfunding, including the reasons behind the delay, but at some point we have to say enough is enough.

Our economy needs an injection of jobs NOW. Crowdfunding has the power to give job creators access to more capital and to infuse local dollars into local economies in an unprecedented way.

You can make a difference. Here are a few tips from the experts on what you can do:

1) If you’re an entrepreneur, don’t wait for the Rulings. Get started now on a crowdfunding platform. Start building your network and meeting investors virtually. Learn how to build a successful crowdfunding campaign, so you can hit the ground running.

2) Keep the pressure on Congress: Call or email your U.S. House Members and U.S. Senators and tell them that the S.E.C.’s delays on the JOBS Act are unacceptable.

3) Write a letter to the editor of your local or regional, or online newspaper, explaining, as Kerrigan says, “the need for JOBS Act implementation, as crowdfunding will fill a critical void for startup and expansion capital, and the longer the delay, the longer it will take for our economy to return to robust levels of growth and job creation.”